ISM Composite Index Showing Contraction

A couple of months ago we first posted our ISM Composite Index which showed the index peaking at levels normally associated with the peak of economic expansion. That index has shown a very sharp decline over the last couple of months and despite the small uptick in last weeks ISM Manufacturing report the decline in the Non-Manufacturing report is holding the index stead at levels consistent with further decline over the next couple of months.

While the economy, and primarily manufacturing, have been boosted by inventory rebuilding over the last two years it remains to be seen if this can ultimately translate into further economic growth without government support through some type of quantitative easing. This becomes especially critical when we are talking about cuts in government spending, increases in unemployment and government transfers (read: handouts) diminishing as a percent of incomes. Commodity prices have subsided a bit in the indexes but cost pressures to both manufacturers and non-manufacturers alike are still likely to be weighing in profit margins. That is the true test the markets are about to run into over the next couple of months as the year-over-year earnings comparisons are going to be much tougher to beat.

Clearly, the consumer, the driver of final demand, is not out of the woods and this in turn is keeping small businesses from hiring, increasing output and stocking up on more inventory. Even the automobile dealers are now fully stuffed to the gills with inventory from the manufacturers and are having a tough time passing it through even with aggressive discounting and incentives. It is all to reminiscent of late 2007 and the same bulls are out touting the "soft landing" scenario for the economy.

Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management. He is also the host of "Street Talk with Lance Roberts", Chief Editor of "The X-Factor" Investment Newsletter and the Streettalklive daily blog. Follow Lance on Facebook, Twitter and Linked-In